IAA'S CAPTIAL MARKET DIVISION
Our Capital Markets Division (“CMD”) offers a full service for our clients by providing virtually every type of fixed income security in markets around the world, including:
Zero Coupon Bonds
High Yield Instruments
Mortgage and Asset Backed Securities
Foreign Currency Denominated Issues in both Developed and Emerging Markets
Our clients benefit from our extensive in-house resources; investment expertise, the latest technology, advanced analytical tools and relationships with a broad network of fixed income dealers and major investment banking firms all contribute to the delivery of top quality trade executions. More importantly, they assist us in working closely with our clients to develop fixed income strategies tailored to their specific needs and objectives.
Working as a team with IAA’s Financial Consultants we recommend a mix of assets in a client’s portfolio that takes into account age, need for current income, risk tolerance and tax considerations. We then determine the most suitable fixed income investments and whether they should be purchased as individual instruments or as part of a bond fund or a unit trust.
Our formula for providing the highest level of client satisfaction is simple.
We listen to our clients
We deliver the fixed income instruments that best fit their needs and objectives
We provide clear answers to their questions
We are accessible to our clients, and that includes senior fixed income managers
We have expertise in the international and foreign currency bond sectors.
Investing in Foreign Currency Denominated Bonds
IAA is very active in the buying and selling of global securities, many of which are denominated in currencies other than the US Dollar. As a service to holders of such securities and to future purchasers, we list below some of the difference between holding foreign denominated (“FD”) with currency being unhedged, vs. US $ securities (“US”).
Following the price vs. the price and the rate of exchanged. The par value of a US security is generally expressed as 100. If a US investor buys at that price, he needs to be aware of price dropping below 100 or rising above it; price movements being dependent upon the falling and rising of interest rates. The par value of an FD security is usually set at 100 as well, in local currency, so the investor needs to follow not only price movements, but the rate of exchanged of the currency against the $US. Assuming an investor purchases a US bond at 100, if the price goes to 102, he has a 2% profit. With an FD bond, a move from 100 to 102 in local currency, plus an increase of, say, 3%, in that currency’s value against the $US, results in an overall return of about $5. Of course, a similar fall in the currency would show a current return down about 1%.
$US vs. FD securities-Coupons. If a US investor purchases a US security with a 7% coupon (interest rate) and he buys at 100, he will get 7% per annum for the life of the bond (assuming the issuer has no credit problems and is able to pay). This is true as well with an FD security; however, the $ US amount of each coupon depends upon the currency/$US exchanged rate at the time the coupon is paid. This means his total interest payments in $US might be higher, or lower, than 7%.
Holding US vs. FD securities until maturity. If a US Investor purchase a security at 100 from a credit worthy issuer, and holds the bond until maturity, he will receive exactly what he paid (along with the coupons received over the time he has held the bond). Holding an FD security with the same scenario may have a different result, which, again, will be due to the currency/$US exchange rate at the time the issue matures. This becomes more critical as the bond gets closer to its maturity date. A sudden, short term shift in the exchange rate can have a material effect on the final amount the investor receives in $US. This is why at IAA, we often urge our clients, especially when they are enjoying paper profits on an FD bond, to sell at least a few months before maturity. As short term move up in the $US, especially for technical reasons, might not impact an investor holding an FD bond if he has years left before the bond matures. Such a move; however, when his bond is about to mature leaves no time for the possible recovery of the foreign currency’s value.
Holding short term vs. long term FD instruments. The example above demonstrates why we generally urge our clients to invest in longer term FD’s. If an investor has a view that the $US is going to fall against a particularly currency, by purchasing a longer term maturity, instrument, he has time on his side, to let possible short term upward moves of the $US smooth themselves out. The shorter term the instrument, the less the change of finding out short term fluctuations. This is why we tend to discourage the purchasing of FD CD’s/ having a shorter term, if the $US rise the CD’s will wither be sold at a loss or rolled over, often with additional fees being charged. We realize interest rate risk and therefore local currency bond prices are magnified when terms are longer as they are with US securities), but we believe most times hat risk is offset by lessening the risk of short term currency fluctuations.
Sovereign risks of US vs. FD securities. This is the risk of holding securities of governments of their agencies. Most investors believe the US government will honor its financial obligations. This is true as well for many industrialized countries. This risk, however, becomes greater with less developed countries. Defaults of countries have been relatively few, but the possibility does exist/ we try to minimize this risk by finding global issuers, such as the World Bank or International Bank for Reconstruction and Development that tend to issue securities denominated in various foreign currencies. This allows the investor to take his currency view while greatly lessening credit risk.
Despite the additional risks of foreign currency investing, there are additional rewards as well. Experts in this area can help you to maximize the rewards and minimize the risks. As our name implies, at IAA we are specialists in foreign markets and currencies. This means we can tell whether FD securities are right for you, and if they are, we will take great care in recommending suitable issues which we monitor continuously.
If you are a client and want to know more about foreign currency denominated securities, please contact your Financial Consultant. Otherwise, call us atto request information on foreign bonds.
BOND RESOURCE CENTER
International Bonds: IAA is very active in the buying and selling of global
- Corporate Bonds: Corporate bonds (also called corporates) are debt obligations.
- Municipal Bonds: When you purchase a municipal bond, you are lending money.
- Gov't and Agency Bonds: When you buy a Treasury security, you are also lending money.
- CD's and other Investments: Brokered CDs are CDs issued by banks that are made available to the customers.